Category: Global Supply Chain

Global Supply Chain News: Container Carrier Capacity Discipline May Be Cracking, as CMA CGM On Brink of Order Largest Ships Ever

After Pulling Back in 2016, Carriers Adding Capacity Again in 2017 and 2018

Aug. 9, 2017

SCDigest Editorial Staff

After several years of binging on new ships, since the start of 2016 the container shipping industry has cut way back on their new ship orders - a trend which clearly has been a factor in the modest recovery in rates in 2017, as the supply-demand balance moves back somewhat in the carriers' favor. (See graphic below.)

Supply Chain Digest Says...

So will these new ship orders once again lead to overcapacity and rates to fall again, in good news for shippers? Likely so, Drewry says.

What do you say?

But that discipline may be seeing a crack, as France's CMA CGM is reportedly on the verge of signing an order for nine 22,000-TEU ships.

Last week, Lloyd's List reported that CMA CGM is in the final stages of negotiations for six firm orders, plus three options. If executed, the ships would become the largest of their kind, overtaking the 21,413-TEU OOCL Hong Kong (and its five sister ships still on order) that was delivered earlier this year. (OOCL of course is being acquired by China's COSCO line.)

Given the chronic (and on-going) overcapacity problem that has wreaked havoc on carrier profits in recent years, what could have tempted CMA CGM to risk undermining the still very fragile recovery?

To answer this question, "We have to remember that first and foremost carriers make decisions and investments with a view to their own standing; the potential impact to the wider industry being a secondary consideration, if at all," not the analysts from Drewry,in a recent blog post. "From CMA CGM's point of view it is faced with demotion in the carrier rankings post COSCO and OOCL merger, while it was also short of top-end ships compared to its nearest rivals."

Drewry also says that with extremely light pace of new ship orders, the underemployed shipyards in China, South Korea and Japan have probably offered a sizeable discount on the ships, further stoking CMA CGM's interest.

"An improvement in cash flows linked to higher freight rates may also have given the carrier more confidence in making large capital investments," Drewry notes.

What's more, Drewry notes that in some ways the new ship deal is all about the company playing catch-up with fellow carriers. CMA CGM's largest active ships are six units of between 17,772 and 17,859 TEU, while the biggest ships in the existing orderbook are three 20,600 TEU units that were originally due this year but were deferred to 2018.

By comparison, Maersk Line has a total of 31 units above 18,000 TEU, either active or on order. Adding all nine new megaships will nearly double CMA CGM's current orderbook to about 423,000 TEU and will help close the gap to its nearest rivals.

All that said, Drewry observes that "as compelling as the individual case may be no carrier operates in a bubble and should this order become reality there could well be some hidden costs that CMA CGM and all of its cohorts will have to bear," adding that "From an industry perspective there is simply no good reason to add these ships to already overcrowded oceans."

Even before the rumored CMA CGM deal, there were already over 700,000 TEU worth of ships on order for 2017 delivery, and another 1.1 million TEU of capacity coming in 2018 - with 40% of total TEU coming from megaships exceeding 18,000 TEU.

So will these new ship orders once again lead to overcapacity and rates to fall again, in good news for shippers? Likely so, Drewry says.

"This unconfirmed order suggests, for some carriers at least, that growing market share remains their driving principle, when the recent trend has been to pay off debt," Drewry concludes. "How many lines share that view will determine whether the industry can stay on the path towards sustainable profitability, or slip up and repeat the arm's race and the over-capacity tendency of the past."

Do you think carriers will again add capacity and send rates tumbling again? Let us know your thoughts at the Feedback section below.